I should preface this with the fact that I’m still very new to mortgage loans in general. I’ve been considering getting a 15-year loan instead of a 30-year fixed loan. The general consensus seems like if you can afford a 15-year fixed mortgage, you should go for it. The interest rate will be lower, you own your home in half the time, and the payments aren’t actually that much higher (definitely not double). But what if you just took a 30-year fixed mortgage and had the discipline to pay enough extra each month to equal the 15-year payment? Would you really be that far behind? The results surprised me.
Using the current average mortgage rates at Bankrate.com (5.68% for 15-year fixed, 5.96% for 30-year fixed):
$300,000 loan at 5.68%, the monthly payment would be $2,480.
$300,000 loan at 5.96%, the monthly payment would be $1,790.
So the difference is $690 (a 38% increase over $1,790). Now, what if you took the 30-year mortgage with no prepayment penalty, and still paid $2,480 each month? According to the calculator at Dinkytown.net, I would shave off 14 years and 6 months. So, it turned my 30-year mortgage into a 15.5-year mortgage!
Since I’d be paying $2,480/month for an extra six months, that would give me an extra cost of about $15,000. That’s a good chunk of money, but I still saved tons of interest over the 30-year loan and in exchange I got the flexibility of making smaller payments if needed. Could be job loss, unexpected expenses, real estate investment opportunity, whatever.
Am I missing something? The interest paid should be about the same, so I’m not losing out on any deductions between the two. Of course, I would need the discipline to keep up the extra monthly payments since the bank won’t be hounding me for it. But if that’s the only obstacle, I would probably prefer the 30-year fixed vs. the 15-year loan.
By Jonathan Ping | Real Estate | 8/27/06, 12:23am